“Why is South Korea so successful?” is the title of the forum thread from Ludwig von Mises Institute. The original poster finds it hard to explain the economic success of South Korea from Austrian perspective. John James replied with five links. The first link is about “Asian Tiger or Asian Kitten?” I clicked the link and found what I have been looking for, an explanation closer to reality than the one reported in The Korea Herald yesterday blaming the free market for the country’s economic woes.

There I found the typical Austrian diagnosis that it is actually the government’s intervention of the free market that account for Korea’s present economic situation. Though the article was written prior to 2008 crisis and referring to financial crisis in the late 90’s, I personally think that nothing substantially has changed since then.

Such intervention is seen through the connection between the government and the “chaebols” (Korean Big Business conglomerates), through the control over the bank of Korea, the role of subsidies, and the fact that every government is a chaebol in itself. The government intervention shows through increasing regulation and artificial low interest rates resulting to misallocation of capital. The continuous printing of money by the Bank of Korea caused imbalances in economic growth, structural corruption, and eventually to the collapse of national economy. Government subsidies played a crucial role in the reallocation of funds and protection of the chaebols from outside competition. An alarming example of such reallocation is related to the $24 billion worth of tax revenues designated for broadband projects. Such reallocation would have future repercussions that are yet to be seen.

Here are two relevant quotations from the article about the connection of the government with the chaebols:

“Furthermore, the South Korean government, which itself played an integral part in the Asian financial collapse of 1997–98 still has a heavy hand in innovation by massively subsidizing and favoring the products and services developed by chaebols such as Samsung, LG, SK Telecom, and Hyundai.”

“State-subsidized Daewoo was involved with such poor financial dealings and shoddy business practices that they ultimately went bankrupt; and both Samsung and Hyundai are under fire for bribing government officials for government contracts.”